The most complicated restructuring – what will the merger of COSCO and China Shipping bring to capital markets?

Xinhua Beijing, December 13 (by Lin Hongmei and Zhao Wenjun) --- China COSCO Holdings Company Limited, China Shipping Development Co., Ltd., China Shipping Container Lines Co., Ltd., and COSCO Pacific Limited simultaneously announced the signing of a series of assets restructuring transaction and service agreements. The stock of the four listed companies was already halted on August 10 this year. At the time of suspension, their total market value is estimated to top RMB 200 billion. According to the overall restructuring plan, the listed companies controlled by COSCO and China Shipping will resume trading in the following week. How is this merger positioned in the capital market? How will it impact the market? The journalists interviewed some insiders.

The most complicated restructuring

According to relevant personnel from China International Capital Corporation Limited, the general financial advisor for this recapitalization project, this restructuring in the end involves 4 listed companies, 7 stocks and over 70 asset transactions. It is the most complicated transaction in China’s capital market and rarely seen in international capital markets.

But why is it so complicated and difficult? Analysts say it is because of the environment we are facing now.

First of all, the restructuring occurs in a recession period of the global shipping industry when container and dry bulk shipping are both at their historic lows. Restructuring in this context requires great determination and adjustment to create a rosy future for the listed companies and boost the confidence of their minority shareholders. Second, the restructuring is under mounting pressure due to the situation of capital market. The capital market is in a volatile period and the stock index upon suspension was 400 points higher than the current figure. Therefore, how can we protect the benefits of minority shareholders and avoid major fluctuations in share price are questions to be taken into consideration. Third, the two groups have a very large business portfolio and involve many links that may overlap with and restrict each other.

Sort out business segments to create synergies

What is the guiding concept for the merger? What steps will the four listed companies take? Insiders believe that after the merger, COSCO and China Shipping will develop four core segments, which are container shipping, terminal operation, oil & gas shipping, and shipping finance.

China COSCO will rent and operate the containerships and containers of China Shipping Container Lines (CSCL), acquire CSCL’s network asset, and sell its dry bulk shipping assets to COSCO Group. COSCO Pacific will purchase China Shipping Ports Development Co., Ltd. - the terminal asset held by China Shipping and CSCL, and sell its subsidiary Florens to CSCL. CSCL will lease its containerships and containers to COSCO Container Lines and sell its stock equity in supporting businesses of container shipping to China COSCO and China Shipping. Meanwhile, CSCL will acquire the shares of COSCO and China Shipping in leasing and financial assets/shares, and sell its stake in China Shipping Ports. China Shipping Development will buy a 100% stake in COSCO Dalian from COSCO, and sell all shares of China Shipping Bulker (after internal bulk transportation is integrated) to COSCO or its subsidiaries.

After the deals are closed, China COSCO will be a listed platform specializing in container shipping services; COSCO Pacific a listed platform specializing in global terminal business; CSCL a listed platform specializing in shipping finance services; and China Shipping Development a listed platform specializing in oil and LNG shipping. According to sources, after the restructuring, the former two shipping giants will undergo deep integration and adjustment of similar business segments, build well-structured bulk, container, tanker and financial platforms, so as to convert their respective advantages to synergies.

What does this restructuring mean for the capital market?

It is said that this restructuring plan will be put into practice next year after being passed at shareholders’ meetings.

Jiang Ming, an analyst with Essence Securities, holds that the troubled global shipping industry has entered the “peak season of M&As in the Great Navigation Era” and the core drivers shall be cost reduction and service improvement based on advantages generated by expanded scale. Similar cases that are underway or completed in the shipping industry include MA CGM’s acquisition of NOL, MSK’s acquisition of P&O Nedlloyd and Sea-Land Service, Hapag-Lloyd’s buyout of CSAV, and the tanker fleet integration between China Merchants Group and Sinotrans. The highlights of this round of restructuring between COSCO and China Shipping are container lines and related terminal assets, followed by tanker and bulk fleets. The complementary advantages between the two groups can help lift corporate competitiveness and profitability in the medium and long run.

According to Zhang Xilin, deputy head of the Research Department of China Merchants Fund, SOE reform is encouraged today, and by fully integrating their quality assets, SOEs can develop a higher anti-risk capability. Chinese and international cases have indicated that if quality financial assets are well integrated with industrial capital, strong synergies can be created and all parties concerned will be benefited.

Jiang Ming analyzed the prospect of business restructuring. He gave an example of container shipping. Since large scale and big alliances are main competitive edges for container lines, the restructuring between the two sides could produce double benefits: internally, it can optimize operating efficiency and improve the bargaining power in feeder, trailer and other cost items; externally, it is possible to form a bigger alliance to rival MSK, MSC and CMA CGM. In addition, stripping the gloomy bulk segment off the listed companies and injecting profitable tanker asset can alleviate their operation burden and shore up investors’ confidence; in the terminal segment, putting together the production elements and resources of both enterprises will lead to more efficient management and synergies, thus unleashing their vitality and potential and creating more value for shareholders.